State tax hikes could go too far

By Ben Rooney, staff reporter


NEW YORK (CNNMoney.com) -- Some U.S. states facing steep budget gaps have resorted to tax policies that could be harmful over the long term, a non-profit research group said Monday.

In a review of 2010 changes in state tax policy, the Tax Foundation said certain states have targeted tax increases on high-income earners, smokers and out-of-state business transactions. These taxes may be politically convenient, but the foundation said that relying too heavily on such sources can lead to problems over the long run.

"Relatively high taxes on high-income individuals, smokers and out-of-state business transactions can make a state less attractive and create more volatility in an already uncertain economic climate," said Joseph Henchman, director of state projects at the Tax Foundation.

The tax increases come as states across the nation struggle to recover from the Great Recession. State tax revenues have been depleted by the weak economy and demand for social services has risen as unemployment remains high.

According the National Conference of State Legislatures, 33 states project budget gaps for fiscal year 2012, and 23 states for fiscal year 2013.

But the Tax Foundation said some states have resorted to targeted taxes and accounting "gimmicks" to paper over budget shortfalls and avoid any significant cuts in spending. This approach is irresponsible, the group says, because it assumes the economy will recover quickly.

"When the recession ends, states need to have the right policies in place that will promote economic growth and maintain revenue stability," said Henchman.

In Oregon, voters approved a measure to temporarily increase income taxes to 10.8% on income over $125,000, and 11% on income over $250,000. This so-called "millionaires' tax" could force high-income earners to leave Oregon, which will eventually hurt the state economy, the Tax Foundation said.

However, other states have eliminated or lowered taxes on top earners.

New Jersey Gov. Chris Christie vetoed a bill in June to renew the state's "millionaires' tax." In addition, Rhode Island passed a tax reform law that would, among other things, lower the top income tax rate to 5.99% from 9.9% in 2011.

Meanwhile, the review said that five states have increased cigarette taxes so far in this year. That compares with a total of 18 states in 2009.

Hawaii, New Mexico, New York, South Carolina and Utah have all recently raised state taxes on tobacco.

Washington has levied a tax on carbonated soft drinks, but New York and the District of Columbia decided against doing so, according to the review. Mississippi is looking into a tax on the syrup used to sweeten carbonated soft drinks. Colorado recently removed sugared beverages and candy from the list of groceries that were exempt from sales tax.

In addition to targeted taxes, the report said some states have raised overall sales tax rates this year.

Arizona voters approved a three-year increase on sales tax to 6.6% from 5.6%. Kansas increases sales taxes to 6.3% from 5.3%. However, Arkansas cut sales taxes on groceries to 2% from 3%.

The review also took issue with a new sales tax regulations in Colorado aimed at online retailers. According to the Tax Foundation, out-of-state retailers such as Amazon have already terminated affiliate relationships within the state and some have launched a legal battle to challenge the law. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 17,136.00 104.86 0.62%
Nasdaq 4,553.14 34.24 0.76%
S&P 500 1,999.19 15.06 0.76%
Treasuries 2.59 -0.00 -0.08%
Data as of 3:36pm ET
Company Price Change % Change
Apple Inc 101.08 -0.55 -0.54%
Bank of America Corp... 16.72 -0.02 -0.10%
Yahoo! Inc 42.58 0.03 0.07%
Facebook Inc 76.03 1.45 1.94%
Alcoa Inc 16.37 -0.02 -0.12%
Data as of 3:21pm ET

Sections

Scotland's independence vote is too close to call but those who want to keep Britain united won this year's campaign funding race by some distance. More

Y Combinator president Sam Altman is teaching a startup class at Stanford with Silicon Valley heavy hitters as guest lecturers. Bonus: All the videos will be available for free online. More

Y Combinator president Sam Altman is teaching a startup class at Stanford with Silicon Valley heavy hitters as guest lecturers. Bonus: All the videos will be available for free online. More

What do all 401K millionaires have in common? Christine Romans explains what it takes to be a member of the club. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.